Despite improving economy,  Arkansas and regional execs concerned about interest rates, labor market

While business growth in Arkansas and surrounding states is not as anemic as the U.S. economy, two closely-watched regional economic reports show supply managers and corporate executives are still concerned about labor market shortages and possible summer interest rate hikes.

According to Creighton University Mid-America Business Conditions Index released on Wednesday (June 1), business growth in Arkansas gained momentum and moved above “growth neutral” in May although the manufacturing sector is caught in a spring downturn.

“In 2015, Arkansas ranked eighth in the nine-state region with exports per manufacturing worker of $38,000,” said economist Ernie Goss, director of Creighton’s Economic Forecasting Group and chair of regional economics in the Heider College of Business. “Additionally, a 19% decline in exports over the past two years contributed to the state’s recent slower economic growth.”

Overall, Arkansas’ in May business index rose to 52.7 from April’s tepid 49.5. Components of the index from the monthly survey of supply managers were new orders at 50.1, production or sales at 52.3, delivery lead time at 53, inventories at 56.3, and employment at 52, according to the leading regional economic indicator.

The Creighton Economic Forecasting Group has conducted the monthly survey of supply managers in Arkansas, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, Oklahoma and South Dakota since 1994 to produce leading economic indicators of the Mid-America economy. A reading above 50 indicates the manufacturing economy is expanding; below 50 indicates it is contracting.

Despite the manufacturing sector swoon, Goss said the overall regional economy is stabilizing with business conditions improving. He said the region’s manufacturing sector is expanding but at a slow pace as gains for nondurable goods producers more than offset continuing losses for regional durable goods manufacturers.

“One of the keys to the level of economic growth in the months ahead will be the interest rate position of the Federal Reserve. If the Federal Reserve telegraphs more aggressive rate hikes in the months ahead at its June meetings, the U.S. dollar is very likely to strengthen thus slowing regional manufacturing,” Goss said.

GOOD WORKERS HARD TO FIND
Regionally, the May Business Conditions index, which ranges between 0 and 100, rose to 52.1, up from April’s 50.1 and March’s 50.6. This is the fourth consecutive month the reading has moved above growth neutral.

For the first time since August 2015, the regional employment gauge advanced above growth neutral. The index climbed to 51.4 from April’s 45.

“Job gains for nondurable goods producers more than offset losses for durable goods manufacturers for the month,” said Goss.

Supply managers were asked to identify the greatest challenge to 2016 business prospects for their company. More than one-fourth, or 26%, named difficulty in finding and hiring qualified workers as the biggest threat to business operations for the remainder of 2016. Almost one-third, or 32.9%, expect U.S. economic weakness to pose the biggest challenge for business operations for the rest of 2016.

The region’s wholesale inflation index for May was unchanged from 62.4 in April. Goss said prices for raw materials and supplies, as reported by regional supply managers, are rising at a pace, if matched in future months, that will push the Federal Reserve to move short-term interest rates up at a pace higher than current market expectations.

According to Goss, one-in-five supply managers in the nine-state regional, or 20.8%, expect a June rate increase to have a negative effect on company economic activity. More than half, or 52.8%, anticipate little, or no impact, while 4.2% expect a positive impact from a Fed rate increase. The remaining 22.2% were unsure of the economic fallout from an interest rate increase.

Looking ahead six months, economic optimism, as captured by the May business confidence index, slipped to 47.7 from April’s 51.3.

“Global economic uncertainty combined with expected higher interest rates pushed the confidence reading lower for the month,” said Goss.

The May inventory index, which tracks the change in the level of raw materials and supplies, increased to 52.9 from April’s growth neutral 50. The new export orders fell to 52.1 from April’s strong 57.6. The import index for May tumbled to 50.1 from 58 in April.

“Recent economic improvements among the region’s key trading partners assisted exports for the month,” Goss said. “At the same time, growth in regional manufacturing pushed supply managers to maintain buying from abroad.”

Export weakness has been a significant factor restraining regional and U.S. growth since 2014. However, the negative impact has been much greater for the region. Over the past two years, regional exports declined by 8.1% compared to a smaller 4.7% loss for the U.S. economy.

FED BEIGE BOOK: EIGHTH DISTRICT GROWING A ‘MODEST PACE’
Wednesday’s Beige Book report by the Federal Reserve shows the expansive Eighth District economy picked up the pace of growth since the last report in early March, mainly on the strength of increasing wages and salaries, low unemployment and higher prices for products and services.

The Beige Book report for St. Louis’ Eighth District, which includes Arkansas and portions of Illinois, Indiana, Kentucky, Mississippi, the eastern half of Missouri and West Tennessee, offers a snapshot of business anecdotal information of key economic activity in different sectors of the sprawling district.

As in the Mid-America economic outlook, manufacturing activity in the Eighth District has been somewhat weaker than previous outlooks over the past year.

“In a recent survey of manufacturers, a majority noted that production, capacity utilization, and new orders were either at the same level or at lower levels in the second quarter relative to a year ago,” the St. Louis Fed reported.

The reported noted that most manufacturers expect a pick-up in activity toward the end of the year. “Conversely, several manufacturing companies reported capital expenditure and facility expansion plans in the District. The majority of manufacturing contacts expect third-quarter production, capacity utilization, and new orders to increase slightly relative one year ago.

On the bright side, the Little Rock real estate market continued to lead the district in sales activity. Year-over-year April home sales increased by 29.3% in the Little Rock area, 4.9 % in Louisville, 7.4% in Memphis, and 5.4% in St. Louis.

“Around 90% of real estate contacts noted that demand for single-family homes was slightly higher compared with the same time last year and that inventories were slightly lower,” the Fed report said.

FARMING, ENERGY SECTOR ACTIVITY
In other sectors, business conditions regional banking and finance were stable as demand remains strong for mortgages, commercial and industrial loans. Credit standards were unchanged for all loan categories, except for credit cards where they were somewhat tighter. Creditworthiness of business and household applicants was unchanged to somewhat improved.

The regional farming and natural resource sectors, which both have been caught in a yearlong downturn, were mixed through the first five months of the year. Corn, cotton, rice, and soybeans were, as of early May, ahead of their respective five-year average levels of planting progress, and crop prices have risen from their lows.

However, district coal production continues to fall, with April production down nearly 40% relative to the same month last year and year-to-date production down 33%. “With the coal extraction environment persistently worsening, contacts reported that profits and profit forecasts are moving deeper into negative territory,” the report noted.

EYES ON FUTURE REPORTS
Meanwhile, U.S. economic watchers are hopeful that the Federal Reserve’s next policy meeting, the June jobless report and other key economic reports will provide a better picture of the overall regional and broader U.S. economy over the next week.

On Friday, the U.S. Department of Labor will release its jobless report for the month of June. In May, the U.S. jobless rate remained unchanged at 5% as only 160,000 new jobs, well below expectations.

A week from today, the Federal Open Market Committee’s (FOMC) will hold its next policy meeting to consider rate hikes on June 14-15. St. Louis Fed chief James Bullard said Monday at a global economic conference in Singapore that global markets appear well-prepared for a summer rate hike.

Also next week, the BEA will release GDP growth for Arkansas and other 39 states in the fourth quarter of 2015. In the third quarter of 2015, Arkansas’ economy grew at an annual rate of 1.9%, slightly below U.S. GDP growth of 2%.

At the end of June, the BEA will release its third and final revised GDP numbers for the first quarter of 2016 on June 28. On a positive note, the Atlanta Federal Reserve’s updated GDPNow model forecast for real GDP growth in the second quarter of 2016 is now expected to come in at robust 2.9%.